Boeing Signals Downtrend on Overstretched Valuation

The stock of Boeing (NYSE: BA) recorded a new 12-month high of $278.63 last week, following an announcement from the European air cargo company Cargolux that it is considering adding more Boeing 747 freighters to its fleet in the upcoming year. Boeing is also expected to announce a raise in dividend next month. Further, the company had seen a surge in orders in the past few months. However, as explained below, the financial ratios indicate that the stock is overvalued at the current levels and a correction can be expected soon.

As mentioned in the previous paragraph, Cargolux intends to increase the number of cargo fleets and Boeing would be the prime beneficiary. Currently, Cargolux flies 23 747 jumbo jets, including 14 747-800s and nine 747-400s. Boeing manufactures both freight and passenger variants of 747 at its Evrett facility. Last year, Boeing mentioned that it may suspend manufacturing 747 due to a decrease in demand. However, a steady inflow of orders keeps the manufacturing of 747 uninterrupted. As of date, Boeing has orders for only five 747 aircrafts.

During the recent Dubai Airshow, Boeing received commitments from customers for $75 billion worth single aisle planes, including a $27 billion order from Flydubai.

The company posted exceptional Q3 results and ended the quarter with $10 billion in cash. Boeing had increased dividend for five consecutive years. Thus, Wells Fargo’s aerospace analyst Sam Pearlstein expects the Chicago-based company to raise dividend by at least 10% to 15% before the next board meeting, scheduled for December 11. If the dividend is raised as expected, then the yield would be about 2.4%, compared to 1.9% of the S&P. Currently, Boeing pays $5.68 per share as yearly dividend, representing a yield of 2.1%. Pearlstein also expects the payout ratio to reach between 49% and 52%. Investors also eagerly await the announcement of a share repurchase program. All these factors sparked a rally in the stock.

The stock is currently trading at a PE ratio of 24.8, while the historic average is 18.3. The forward PE ratio is 24.4, while that of S&P is 21.1. Likewise, the price to sale ratio is 1.8, versus a historic average of 1. Thus, fundamentally, the stock is overvalued and we can expect a correction to begin soon.

Technically, the steep price rise in the past few trading sessions calls for a correction in the stock, which is facing resistance at 277. The weakness in the stock is also confirmed by the RSI indicator which has started making lower highs. Thus, we can expect a downtrend to begin soon.

We wish to benefit from the downtrend by investing in a put option offered by a binary broker listed here. However, to proceed further, the stock should be trading near $277 in the NYSE, and a contract valid for a period of one week should be available.

Disclaimer: The trading analysis offered here is our opinion. It is not provided as trading advice, merely an indication of our trading plan. We cannot guarantee success and we encourage traders to incorporate a strong money management strategy to limit losses. Please use this article as part of your own research before formulating strategies prior to trading.

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